Note: I believe Palo Alto has great employees who work hard and provide wonderful service to to citizens of Palo Alto. However, I think the structure of the pay and benefits of city government and the structure of its management structure could be streamlined in order to reduce costs.
ONE: PAY AND BENEFITS: A problem arises when the cost of benefits is 40%-70% of salaries (guesstimate on my part from reading articles lately - I'd be thrilled if anyone has evidence this isn't true in Palo Alto). This is not sustainable unless salaries are way below market (seems unlikely from published stories recently - nor do I want below market salaries for our employees).
The city council should commission a study to determine the average % of salaries spent on benefits for Palo Alto and for best in class cities & public companies. They should then establish a goal for Palo Alto. Negotiations with employees should focus on how they want that % spent, which could mean reduced benefits or more cost-sharing. This is similar to the cafeteria plan implemented by many private companies.
To get cooperation from employees, I recommend total transparency in the process of how the % is determined and how it compares to other cities and public companies. Also, benefits should be the same across the entire city staff. Raises & benefits should not be higher for salaried vs. hourly nor for top management vs. workers.
In fact, benefit % should be higher at lower salary levels because of the high cost of medical benefits, which are the same at any level. It is a sign of major inequities when the % cost of benefits of higher salaried employees is higher than those with lower salaries. Again, city council should analyze this data.
In the case of rolled over sick pay and vacation paid out at retirement, these benefits should be limited as they are in private industry. When paid at retirement, these benefits are accrued at one pay rate, but paid out at a much higher rate many years later when the employee retires. This is why most companies have caps on vacation rollovers and have eliminated the payout of sick pay. Taking cash instead of vacation within a couple years of earning it is reasonable - taking it many years later at retirement is not. This approach is called "use it or lose it."
RANT on current system (city council can do nothing about this unless they can use someone besides CALPERS to manage trust funds for employee benefits):
To make matters worse (although this is definitely the right way to do it), cities and public companies are required to accrue liabilities to pay for future benefits. In most cases, trust funds are established and funded to make sure there is money to pay those liabilities when they come due. However, when those trust funds are invested in the stock market, which while longterm is the best investment, the results are volatile in the short term. Then cities have much higher expense to make up for losses in years when the tax revenues are at their lowest. One answer is to have the required payments to the fund based on the average value of the funds over many years, eliminating some of the volatility. While this is done somewhat today, I think the average is over 5 years, and even that is under attack (actually it is a lot more complicated - too complicated to get into here). In general, the average should be longer or the funds should be invested in less volatile investments.
TWO: MANAGEMENT STRUCTURE Major savings could come from a top to bottom review of span of control. I don't have access to the structure of Palo Alto's city government but the city council does. One possible algorithm would be 4-5 levels of management in a city the size of Palo Alto. Any management position with less than 5 employees would be combined with another position. The average number of employees for a manager should be 7-10 with a maximum of 15. You also have to take into account managing contractors.
I'm not an HR expert so there might be a different algorithm more appropriate for Palo Alto. But I do know that to maximize value in an organization, you need to regularly look at the overall structure of benefits and staffing to have a cost-effective organization.